APRA releases discussion paper on Basel III

Reporter Phillip Lasker has been examining a discussion paper released by Australia's banking regulator on the tougher regulations introduced under Basel III in response to the global financial crisis.

Transcript

TICKY FULLERTON, PRESENTER: Australia's banking regulator has released a discussion paper on the tougher regulations under Basel III in response to the global financial crisis.

As expected, the proposed changes include new governance rules, requirements for banks to hold more liquid assets and rules forcing lenders to match the term of their lending with their funding more closely.

Well Phillip Lasker has been taking a look at the measures and I spoke to him earlier.

Well Phil, it's a complicated area, but what are regulators trying to achieve here?

PHILLIP LASKER, FINANCE CORRESPONDENT: Well they're trying to make banks safer in the wake of the global financial crisis, they're trying to make banks carry more capital as a buffer against bad times. They're trying to marry up a bank's activities with its security because banks tend to lend long and raise money on a short-term basis and so they're trying to marry up the security a bank holds with those sorts of activities.

TICKY FULLERTON: So that means matching assets presumably?

PHILLIP LASKER: Yes, matching assets, that's right. And there's also a short-term requirement they want to increase where if there's a global financial crisis again or the system freezes up, instead of banks being able to survive for say five days, as they are - as they could now, given their liquid assets, they've extended that to 30 days and they need to hold more assets like government bonds to survive through that period.

It's interesting though, if you're a Greek bank, you can hold Greek government bonds. That was not something foreshadowed when they actually wrote these rules, which was before the Greek crisis exploded.

TICKY FULLERTON: Boy, you'd think they'd have to look at that again. But, from the Australian point of view as well, I mean, we don't really have enough government bonds, do we, to run for 30 days?

PHILLIP LASKER: Well we don't and that's where the situation here is slightly different. Our banks can't get enough government bonds. We know that, we've known that for a long time.

So the Reserve Bank has come in, will provide a facility, a line of credit, if you like, for our banks where they can put other assets into the Reserve Bank and get cash in exchange for that. They'll only use the facility if there's a major crisis. But they will be charged an annual fee for that line of credit: ...

TICKY FULLERTON: Of course.

PHILLIP LASKER: ... 15 basis points on whatever the amount - the line of credit - on whatever that line of credit is required. So, a talking point as a result of all these regulations is: what will it cost the banks? Andrew Dickinson, who's the KPMG's banking specialist, was talking about some of those costs.

ANDREW DICKINSON, KPMG: Banks are going to have to hold a higher proportion of their assets as liquid assets and APRA's been very clear that the only assets that will qualify as these liquid assets are government bonds. So those assets are very low yielding and will therefore create a bit of a drag on bank earnings having to hold that high proportion of low-yielding assets.

They also are going to have to borrow more of their funding longer term to match the longer term of their lending, and borrowing longer term also comes at a higher cost.

PHILLIP LASKER: But those costs, when measured across the entire banking spectrum or all their assets, in net terms some people say should be about six basis points which the banks would then of course pass on to their customers.

TICKY FULLERTON: And so finally, what's this all mean for bank boards?

PHILLIP LASKER: Well bank boards are going to be far more accountable, far more responsible and they're going to be involved in monitoring more closely the activities of the bank, and Andrew Dickinson pointed that out.

ANDREW DICKINSON: Boards now will need to be focusing very heavily on the liquidity plans that banks have in place, the controls the banks have in place around liquidity and the scenario analysis they're doing to determine what sort of buffers they need over the minimum ratios.

PHILLIP LASKER: I should add that these regulations generally have their fair share of critics.

There are those who say that banks are so smart, no matter what regulations are introduced, they'll find ways around them, they'll find ways to reduce the accountability or transparency, I suppose.

And there are others who say that these regulations, they're restrictive, they impose costs on banks, and that's the last thing you need when you've got economies under stress and you need banks which are considered the engines for growth to actually drive the economy.

TICKY FULLERTON: Phil Lasker, a subject not for the faint-hearted. Thank you very much for unpacking all that for us.